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Thursday, October 17, 2013

NSA Revelations Kill IBM Hardware Sales in China

Wolf Richter www.testosteronepit.comwww.amazon.com/author/wolfrichter
The first shot was fired on Monday. Teradata, which sells analytics
tools for Big Data, warned that quarterly revenues plunged 21% in Asia
and 19% in the Middle East and Africa. Wednesday evening, it was IBM’s
turn to confess that its hardware sales in China had simply collapsed.
Every word was colored by Edward Snowden’s revelations about the NSA’s
hand-in-glove collaboration with American tech companies, from startups
to mastodons like IBM.
But the fiasco was tucked away under the lesser debacle of IBM’s
overall revenues, which fell 4.1% from prior year, the sixth straight
quarter of declines in a row. Software revenue inched up 1%, service
revenue skidded 3%. At the hardware unit, Systems and Technology,
revenue plunged 17%. Within that, sales of UNIX and Linux Power System
servers plummeted a dizzying 38%. Governmental and corporate IT
departments had just about stopped buying these machines.
IBM quickly pointed out that there were some pockets of
growth in its lineup: business analytics sales rose 8%, Smarter Planet
20%, and Cloud, that new Nirvana for tech, jumped 70%. But in the
overall scheme of things, they didn’t amount to enough to make a big
difference.
All regions were crummy. Revenues in Europe/Middle East/Africa ticked
up 1%. In the Americas, they ticked down 1% – “The improvement came
equally from the US and Canada and once again, we had strong performance
in Latin America,” is how CFO Mark Loughridge spun the situation during
the earnings call because it was less bad than last quarter.
But there was nothing to spin in Asia-Pacific, where revenues plunged
15%. Revenues in IBM’s “growth markets” dropped 9%. They include the
BRIC countries – Brazil, Russia, India, and China – where revenues
sagged 15%. In China, which accounts for 5% of IBM’s total revenues,
sales dropped 22%, with hardware sales, nearly half of IBM’s business
there, falling off a cliff: down 40%.
Mr. Loughridge, in his prepared statement, tried to come up with a logical-sounding panic-free explanation:

We
were impacted by the process surrounding China’s development of a broad
based economic reform plan, which will be available mid-November. In
the meantime, demand from state-owned enterprises and the public sector
has slowed significantly as decision-making and procurement cycles
lengthened.

So, would that unprecedented collapse of demand for hardware in China
end after mid-November? Nope. These “changes will take time to
implement,” he warned. In fact, he did not expect demand to pick up
“until after the first quarter of next year.” Not anytime soon.
No one believed that rigmarole.
When an analyst needled him, Mr. Loughridge began to deviate from the
scrip: “The hardware business across those elements of the product line
accepting zSeries performance (IBM mainframe computers), it was down
substantially. We were talking 40%, 50%. Enormous reductions on a
year-to-year basis in a geography where we intended to see growth rates.”
They’d intended to see double digit growth rates. He
referred to last year, when sales in China were up 19%, “driven heavily
by really strong performance in hardware base,” he said. But suddenly,
hardware sales collapsed “40%, 50%” from last year. IBM didn’t even have
time to come up with a credible excuse. He was struggling to make sense
of it, grasping at flimsy straws and the same economic reform plan
theory that no had believed earlier, but this time, it got all tangled
up:

And
you got to look at that and say, what significantly accounts for that.
And I would say, quite honestly, if you look at the elements in China
and we have worked with the team in China that simply has been a
substantial impact as the process surrounding China’s development of
broad based economic reform plan takes shape. And that is going to be
announced and available, we think in November and probably it will take
some time to implement. So I think we are looking at a couple of
quarters, but once that economic plan is announced, it adds clarity to
market, we should see, I think and fairly within our team, a recovery in
the demand pattern for state-owned enterprise public sector.

The explanation is more obvious. In mid-August, an anonymous source told the Shanghai Securities News,
a branch of the state-owned Xinhua News Agency, which reports directly
to the Propaganda and Public Information Departments of the Communist
Party, that IBM, along with Oracle and EMC, have become targets of the
Ministry of Public Security and the cabinet-level Development Research
Centre due to the Snowden revelations.
“At present, thanks to their technological superiority, many of our
core information technology systems are basically dominated by foreign
hardware and software firms, but the Prism scandal implies security
problems,” the source said, according to Reuters. So the government would launch an investigation into these security problems, the source said.
Absolute stonewalling ensued. IBM told Reuters that it was unable to
comment. Oracle and EMC weren’t available for comment. The Ministry of
Public Security refused to comment. The Development Research Centre knew
nothing of any such investigation. The Ministry of Industry and
Information Technology “could not confirm anything because of the
matter’s sensitivity.”
I’d warned about its impact at the time [read.... US Tech Companies Raked Over The Coals In China].
Snowden’s revelations started hitting in May. Not much later, the
Chinese security apparatus must have alerted IT buyers in government
agencies, state-owned enterprises, and major independent corporations to
turn off the order pipeline for sensitive products until this is sorted
out. As Mr. Loughridge’s efforts have shown, it’s hard to explain any
other way that hardware sales suddenly collapsed by “40%, 50%” in China, where they’d boomed until then.
This is the first quantitative indication of the price Corporate
America has to pay for gorging at the big trough of the US Intelligence
Community, and particularly the NSA with its endlessly ballooning
budget. For once, there is a price to be paid, if only temporarily, for
helping build a perfect, seamless, borderless surveillance society. The
companies will deny it. At the same time, they’ll be looking for
solutions. China, Russia, and Brazil are too important to just get
kicked out of – and other countries might follow suit.
In September, IBM announced that it would throw another billion at
Linux, the open-source operating system, to run its Power System servers
– the same that China had stopped buying. It seems IBM was trying to
make hay of the NSA revelations that had tangled up American operating
system makers. Linux, free of NSA influence, would be a huge competitive
advantage for IBM. Or so it would seem. Read.... The Other Reason Why IBM Throws A Billion At Linux (With NSA- Designed Backdoor)

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